Marijuana Law, Policy, and Authorityhttps://my.vanderbilt.edu/marijuanalaw
marijuana lawWed, 13 Feb 2019 23:20:40 +0000en-UShourly1https://wordpress.org/?v=4.5.16Federal Court Refuses (for now) to Order Return of 7,000 Pounds of “Hemp” Seized by State Policehttps://my.vanderbilt.edu/marijuanalaw/2019/02/federal-court-refuses-for-now-to-order-return-of-7000-pounds-of-hemp-seized-by-state-police/
https://my.vanderbilt.edu/marijuanalaw/2019/02/federal-court-refuses-for-now-to-order-return-of-7000-pounds-of-hemp-seized-by-state-police/#respondWed, 13 Feb 2019 23:20:40 +0000https://my.vanderbilt.edu/marijuanalaw/?p=571In late January 2019, Idaho state police seized a shipment of nearly 7,000 pounds of cannabis plant material on its way from Oregon to Colorado. They have also charged the driver of the truck with felony marijuana trafficking. See coverage of the case at CNN.com, here, and at the Idaho Statesman, here.

The case raises several interesting legal questions involving the application of the 2018 Farm Bill. I have already discussed the Farm Bill in some detail. See New Congressional Farm Bill Legalizes Some Marijuana. Here, I will address the questions posed by the Idaho case. But first, let me provide some additional background.

The plant material in the truck belonged to Big Sky Scientific (BSS), a Colorado-based CBD wholesaler. BSS claims the material is lawful “hemp”, and not marijuana, because it has a low THC content. Per my earlier post linked above, the Farm Bill defines “hemp” as the cannabis plant or any part thereof containing less than .3% THC by dry weight. BSS claims that it bought the material from Boones Ferry Berry Farms (“Boones Ferry”), an Oregon-licensed hemp producer, and that tests performed by two different laboratories indicated that the THC content of the crop was well below the cap set by the Farm Bill for hemp.

Soon after the seizure, BSS filed a federal lawsuit against the state demanding the return of the “hemp”, which it claims is worth $1.3 million. Indeed, the company has sought an emergency temporary restraining order (TRO) because the value of the seized “hemp” is likely to drop precipitously. In its Memorandum in Support of Plaintiff’s Motion for TRO, the company explains:

“Like most agricultural crops, industrial hemp is perishable. . . . It must be stored in a climate-controlled setting, unbundled, with space between the product to allow air flow so the product can ‘breathe.’ . . . If stored improperly, it can mold. Id. If any portion of a bail of industrial hemp molds, the entire bail becomes useless, loses all commercial value, and must be discarded. . . . Even without spoiling, the longer industrial hemp sits, the more the CBD trapped inside dissipates, thus lowering the value of the product.”

(Memorandum, p. 8-9.)

Now, let me get to the questions posed by the case

Was possession of the plant material legal?

Not under state law. The criminal charges and seizure both stem from state law, not federal law. And Idaho continues to define “marijuana” as the federal government once (and until very recently) did: as “all parts of the plant of the genus Cannabis . . . [except] the mature stalks”, regardless of THC content. Idaho St. § 37-2701(t). (See my book pages 17-27 for a discussion of legal definition of marijuana.) Hence, even if the cannabis plant material found in the truck is “hemp” under federal law, it is still “marijuana” under Idaho law – and the latter is most relevant for this state case.

Possibly not even under federal law. To be sure, as I explain my earlier post, the Farm Bill legalizes the possession (etc.) of cannabis plants and plant material when those products contain less than .3% THC by dry weight. It does so by redefining “marijuana” to exclude ultra-low THC cannabis plants and plant material (including extracts, like CBD). Such plants and plant material are now called “hemp.”

Even though BSS insists the plant material seized from the truck meets the Farm Bill’s definition of “hemp”, the court expressed some skepticism in its decision denying the emergency TRO. For example, it noted there were blanks in one of the test reports proffered by BSS and a long gap (nearly 3 months) between the date when the lab sampled the crop and the date when the crop was actually seized. (Big Sky Scientific v. Idaho State Police, Decision re TRO, p. 10, n.5). That gap may be relevant because the THC concentration found in cannabis plants changes across time.

Interestingly, the state police also tested the seized material for THC—even though, as I noted above, Idaho’s definition of “marijuana” does not hinge on the presence (or absence) of THC. But it appears the police did so only to take advantage of an evidentiary presumption created by Idaho law. After the language quoted above defining marijuana, the state law declares that “[e]vidence that any plant material . . . contains any of the chemical substances classified as tetrahydrocannabinols shall create a presumption that such material is ‘marijuana’ as defined and prohibited herein.” Idaho St. § 37-2701(t). For purposes of this evidentiary presumption, it only mattered whether (or not) the plant material contained “any” THC, so the state lab did not bother to measure the concentration of THC in the shipment. In other words, the state’s test does not indicate whether (or not) the shipment constituted “hemp” for purposes of federal law.

To be sure, if the federal government were to prosecute BSS’s employees (or the truck driver), it would need to prove beyond a reasonable doubt not only that the material was, in fact, “marijuana” (and not “hemp”), but also that the defendants knew the material in the truck was “marijuana” (and not “hemp”). The book discusses the knowledge requirement on pages 36-54 and 589-593. Meeting that burden could prove difficult, given the steps BSS appears to have taken to verify that the crop met the Farm Bill’s legal definition of “hemp.” BSS may have been mistaken about what it possessed, but the criminal law usually does not punish such mistakes.

(As I noted in my previous post, the Farm Bill shields hemp producers from prosecution for negligently growing cannabis plants with a THC concentration higher than .3%. But even if that provision makes it even harder for the federal government to prosecute farmers, it does not apply to wholesalers (like BSS) or truckers. It is a Farm Bill, after all.)

Might the Farm Bill nonetheless preempt state prohibitions on hemp?

Nonetheless, and assuming this was ultra low THC “hemp,” BSS claims that Idaho’s marijuana prohibition is preempted insofar as it is applied to the interstate shipment of cannabis that meets the Farm Bill’s definition of “hemp.” In its memorandum in support, BSS argues that

“Congress has clearly spoken on the issue of industrial hemp. Big Sky’s shipment is industrial hemp. Without question, industrial hemp is legal at the federal level and considered to be an agricultural crop. While it remains the prerogative of each state to enact its own drug laws, those state laws cannot be enforced in a manner that conflicts with federal statutes. Congress has entirely preempted the area of interstate transportation of industrial hemp, so any state law that conflicts with that complete preemption must give way under the Supremacy Clause.

(Memorandum, p. 10). In other words, “Idaho can prohibit the sale and marketing of industrial hemp within its borders, but it cannot enforce its local laws so stringently as to cut off interstate commerce of what is considered lawful at the federal level.” (Memorandum, p. 16).

The company bases this preemption claim on Section 10114(b) of the Farm Bill:

“No State or Indian Tribe shall prohibit the transportation or shipment of hemp or hemp products produced in accordance with subtitle G of the Agricultural Marketing Act of 1946 (as added by section 10113) through the State or the territory of the Indian Tribe, as applicable.”

Thus, so the argument goes, Idaho must return BSS’s “hemp”, even if the state criminalizes the possession thereof, because BSS was only shipping it through the state.

However, the state successfully rebutted this claim – at least for purposes of defeating BSS’s motion for an emergency TRO.

In its decision denying the emergency TRO, the court noted that BSS “does not contend, and it is not clear on the present record whether it could contend, that the product seized was actually produced in compliance with subtitle G” as required by the Farm Bill. (Decision, p. 9). As explained in my previous post, and as the court surmises,

“Subtitle G contains not just the definition of hemp (which is the fulcrum of Plaintiff’s argument), but also the provisions detailing how states can create their own regulatory plan for hemp production and the means (the obligation actually) by which the Secretary of the United States Department of Agriculture is to create a federal regulatory plan for hemp production. Subtitle G requires a myriad of procedures, record-keeping requirements, inspection requirements, enforcement requirements, and other details which create a statutory frame around the production of hemp in the United States.”

(Decision, p. 11).

The problem is that,

“even though Big Sky may, at some point in time, be able to purchase industrial hemp that has been ‘produced in accordance with Subtitle G,’ the hemp that was seized in Idaho could not possible meet that standard because no ‘plans’ to regulate the production of industrial hemp under the 2018 Farm Bill have either been approved (by the federal government as to Oregon . . .) or created and promulgated by the United States Department of Agriculture for the federal government (to apply in the absence of an approved state or tribal plan).”
(Decision, p. 11).

Thus, “Big Sky has not persuaded the Court that it is likely to succeed on the merits” (Decision, p. 13), part of its burden in obtaining a TRO.

Even though the court denied the emergency TRO, it’s possible BSS might yet obtain an injunction from the court ordering return of the plant material — say, if it produces additional evidence to support its claim that the hemp was produced in compliance with the Farm Bill. But given the court’s reasoning, I think it unlikely the company will ever prevail.

The bigger lesson here is that BSS may have been too hasty in seeking to take advantage of the Farm Bill. (Likely, it’s not the only company to do so.) It (and the truck driver, who works for an independent shipping company) may pay a steep price for this haste.

That’s it for now. I’ll post on more developments in this case as they become available.

Back in late November 2018, the United States Tax Court issued a noteworthy decision in a tax proceeding against Harborside Health Center, one of the nation’s largest (if not THE) largest state licensed marijuana suppliers. The full decision in Patients Mutual Assistance Collective Corporation, dba Harborside Health Center v. I.R.S. can be found here. It’s long (62 pages) but well written (and with a dose of humor).

No deduction or credit shall be allowed for any amount paid or incurred during that taxable year in carrying on any trade or business if such trade or business . . . consists of trafficking in controlled substances . . . which is prohibited by Federal law . . .

In this post, I’ll discuss two of the Patients Mutual Court’s more noteworthy rulings and make two broader observations about Section 280E.

Let me begin with some background. The case at hand stemmed from an IRS audit of Harborside’s federal tax returns for 2007-2012. Although Harborside paid federal taxes for those years, the IRS claimed the company’s tax payments were deficient (by tens of millions of dollars), for two main reasons. First, the IRS found that Section 280E applied to Harborside, and thus, Harborside had improperly deducted millions in business expenses while calculating its tax liability. Second, the IRS found that Harborside had used the wrong section of the tax code to calculate its Cost of Goods Sold (COGS) and thus, lower its federal tax liability.

The court sided with the IRS on each of these issues.

First, the court rejected Harborside’s claim that Section 280E doesn’t apply to the marijuana dispensary. Harborside acknowledged that it sold marijuana (and lots of it – between 2007-2012, it sold more than $100 million worth). But the company noted that it also engaged in other activities, like selling goods without marijuana (e.g., t-shirts) and offering free therapeutic services to patients (e.g., yoga classes). According to Harborside, performing these other activities brought the company outside the reach of Section 280E. As the court recounts,

Harborside argues that ‘consists of’ [in the language of Section 280E] means an exhaustive list—or in other word that section 280E applies only to businesses that exclusively or solely traffic in controlled substances and not to those that also engage in other activities.

Patients Mutual, p. 25.

Not for the first time, the court rejected this narrow interpretation of Section 280E. But the Patients Mutual decision is noteworthy because it provides the court’s fullest explanation to date for why it refuses to read the tax provision so narrowly.

The main reason is that the court thought Harborside’s interpretation would render Section 280E ineffective and / or lead to absurd results. The court acknowledged that “Dictionaries, the [Tax] Code, and caselaw all show that ‘consists of’ can introduce either an exhaustive list or a nonexhaustive list” of the activities of the taxpayer. Id. at p. 34. However, the court favored the latter interpretation because it “is the only option that doesn’t render section 280E ineffective and absurd.” Id. at pp. 34-35. In particular, the court reasoned that

If [280E] denies deductions only to businesses that exclusively traffic in controlled substances, then any street-level drug dealer could circumvent it by selling a single item that wasn’t a controlled substance–like a pack of gum, or even drug paraphernalia such as a hypodermic needle or a glass pipe. This reading would edge us close to absurdity. . .

Id. at p. 27.

Although the court held that section 280E prevents a marijuana business (like Harborside) “from deducting its business expenses,” id. at 37, the ruling is not quite so onerous as first seems. Namely, the court acknowledged that a marijuana business “can still deduct expenses for any separate, nontrafficking trades or businesses.” Id.

In Harborside’s case, however, this concession was of little import. The court found that Harborside’s other activities (e.g., selling goods without marijuana and providing free therapeutic services) were not sufficiently distinct from its “primary purpose”, that of “selling marijuana and products containing marijuana.” Id. at p. 41. For example, the court noted that Harborside’s sales of marijuana and products containing marijuana generated roughly 99% of the firm’s revenues. By contrast,

Harborside’s sale of items that didn’t contain marijuana–such as branded clothing, hemp bags, books about marijuana, and marijuana paraphernalia such as rolling papers, pipes, and lighters–generated the remaining 0.5% of its revenue. The same Harborside employees who bought, processed, and sold marijuana also sold these items, but selling them took up only 5-10% of their time. The nonmarijuana items occupied only 25% of the sales floor where Harborside sold marijuana, and that sales floor was accessible only to patrons who had already presented their credentials to security–which means that no one who couldn’t buy marijuana could buy these nonmarijuana items. And the record shows no separate entity, management, books, or capital for the nonmarijuana sales.

Id. at pp. 41-42.

Likewise, the court found that the free therapeutic services Harborside offered to patients were merely

incidental; Harborside’s security spent only 5% of its time checking in people for the services, while spending 60% of its time checking in people who were there to buy marijuana. And independent contractors, rather than Harborside’s own employees, provided those services. During the years at issue Harborside paid those contractors a total of only about $680,000–less than 1% of its sales revenue from marijuana.

Id. at pp. 44-45.

For these reasons, the court concluded that Harborside could not deduct expenses related to the sale of non-marijuana goods and the provision of those free therapeutic services.

Second, the court also rejected the method Harborside had used to calculate its COGS and thereby reduce its federal tax liability. Notwithstanding the fact that Section 280E bars drug businesses like Harborside from deducting their business expenses (e.g., sales expenditures), federal tax law does allow such businesses to subtract their COGS from gross revenue when calculating their federal income taxes. As the Patients Mutual Court explains,

The fact that Harborside can’t deduct any of its business expenses doesn’t mean it owes tax on its gross receipts. All taxpayers–even drug traffickers—pay tax only on gross income, which is gross receipts minus the cost of goods sold.

Id. at p. 48.

“COGS is the costs of acquiring inventory, through either purchase or production.” Id. at p. 49. But the Tax Code specifies two different ways to calculate COGS, one for producers and the other for resellers. The method for producers is (ostensibly) more generous. To simplify somewhat, it appears to allow producers to count some “indirect production costs,” including “an appropriate portion of management expenses” as COGS. Id. at p. 51 (quoting regulations). The method for resellers, by contrast, allows them to count only the “price they pay for inventory plus any ‘transportation or other necessary charges incurred in acquiring possession of the goods’”, id. at p. 51 (quoting regulations), which would appear to exclude all indirect expenses.

To take advantage of the more generous method of calculating COGS, Harborside claimed that it was a producer, at least for part of its business—namely for the marijuana bud it bought from growers then sold to patients. As the court explained,

Harborside was without question a reseller of the marijuana edibles and non-marijuana-containing products it bought from third parties and sold at its facility. But the situation is more complex for the marijuana bud it sold. Harborside insists it produced this marijuana and can include in its COGS the indirect inventory costs [allowed by regulations].

Id. at p. 57.

Whether Harborside was a producer or mere reseller of this bud turned on the definition of “production” employed by the Tax Code. The court rejected the definition favored by the IRS, one that defined production as “to change the essential character of . . . merchandise.” Id. at p. 57. (This is probably how most people would define “production.”) Instead, the court found that the Tax Code definition of production “turns on ownership [of the merchandise]–ownership as determined by facts and circumstances, not formal title.” Id. at p. 60. Thus, to be considered a producer of the bud it sold, Harborside had to show that it exercised control over the bud throughout the cultivation process.

Harborside claimed to have satisfied this burden:

It points out that it bought marijuana only from its members, and even then only if the members used Harborside’s clones (which they either bought or received for free), took Harborside’s growing class, followed Harborside’s best practices, and met Harborside’s quality-control standards.

Id. at p. 61.

However, the court found that Harborside had not exercised enough control over the bud to be considered the owner (and thus the producer) thereof. The court emphasized that

Harborside, . . . didn’t create the clones [growers used], maintain tight control over them, order specific quantities, prevent sales to third parties, or take possession of everything produced. Harborside bought clones from nurseries and either sold them to growers with no strings attached or gave clones to growers expecting that they’d sell bud back to Harborside. Nothing prevented either type of grower from selling to another collective. . . Harborside had complete discretion over whether to purchase what bud growers brought in, paid growers only if it purchased their bud, and at times rejected the ‘vast majority’ of its growers’ bud. And Harborside thought growers could do whatever they wanted with the rejected bud.

Id. at pp. 61-62. Thus, Harborside was a reseller—not a producer—for purposes of the Tax Code, and it could not include any indirect expenses in its COGS when calculating its federal tax liability.

The court’s decision on these two matters (among others) means that Harborside is facing a hefty tax bill. It might also face penalties, though the court has yet to make a decision on those.

Now let me make two brief observations about Section 280E

1. Marijuana suppliers probably can’t avoid Section 280E, but the states could do something to lessen the provision’s impact on those suppliers.

Harborside’s lawyers appear to have left no stone unturned in seeking to minimize their client’s exposure to Section 280E (even the 16th Amendment! see the opinion). This suggests it may be impossible for marijuana suppliers to avoid the added tax liability imposed by Section 280E. And since only Congress can revise Section 280E (e.g., the IRS lacks the authority to do so), marijuana suppliers will face this added tax burden until Congress adopts new legislation (either a reform to Section 280E or a proposal like the STATES ACT).

In the meantime, however, I think there may be a way for the states to blunt the impact of this provision: Allow state licensed marijuana suppliers to deduct the marginal cost of Section 280E from their state corporate taxes. In other words, if a Licensee owes the federal government an extra $100,000 because of Section 280E, the state could allow that Licensee to deduct $100,000 (or a portion thereof) from its taxable income for purposes of calculating its state corporate tax liability. (In similar fashion, Congress allows taxpayers to deduct certain state taxes when calculating their federal taxes.) This new deduction would presumably lessen the overall tax paid by the Licensee, with the exact amount depending on factors like the state corporate tax rate.

I’m not saying this is necessarily a good idea; among other things, it would cost the state the foregone tax revenue. But if a state is worried about the financial viability of the marijuana industry, this proposal might help.

2. Section 280E could influence the structure of the marijuana industry.

Prior to Patients Mutual, I had not been aware of the different treatment of producers and resellers under federal tax law. To be sure, the difference may not amount to much – i.e., the expenses producers may include as part of COGS may not be that much greater than the expenses resellers may include. But on the assumption that there is a meaningful difference in the federal tax liability of producers and that of resellers, let me suggest the following: Section 280E (or more precisely, the rules for calculating COGS) may encourage vertical integration in the marijuana industry. (The structure of the marijuana industry and state regulations thereof are discussed in the book on pages 507-517.)

The idea is that a vertically integrated firm may be able to count more indirect expenses as COGS than could two independently operated firms (a producer and a reseller). This means that the total federal tax liability of that integrated firm may be less than the total federal tax liability of the two independent firms combined.

To illustrate. Imagine one vertically integrated marijuana supplier with total sales of 100, direct expenses of 50, and indirect expenses of 40. Suppose this vertically integrated firm it is able to include all of those direct expenses and half of those indirect expenses as COGS, resulting in taxable income of 30 under federal law (100-50-20). Now imagine this company is split into two separate firms – a producer (P) and a reseller (R). Assume that P and R operate as efficiently as the integrated firm does (i.e., there are no economies of scale / scope). R has sales of 100 (the same as the vertically integrated firm), with direct expenses of 70 and indirect expenses of 20. P has sales of 70, with direct expenses of 50 and indirect expenses of 20. Combined, P and R have sales of 170, direct expenses of 120, and indirect expenses of 40. Both P and R are able to count their direct expenses as COGS; but suppose that only P may include any of its indirect expenses in COGS (again, let’s say one-half of those expenses). In this hypothetical, taxable income of the two firms combined (and after COGS) is 35, rather than 30 (for the single, integrated firm). The reason for this increase is that R, as a reseller, can no longer pawn off some of the indirect expenses of supplying marijuana as COGS.

The actual impact of these tax rules on industry structure will, of course, depend on a variety of factors (e.g., the amount of indirect expenses firms actually incur and what portion of those expenses producers — but not resellers — may include in COGS). But it’s some food for thought.

That’s it for now.

]]>New Congressional Farm Bill Legalizes Some Marijuanahttps://my.vanderbilt.edu/marijuanalaw/2018/12/new-congressional-farm-bill-legalizes-some-marijuana/
Fri, 14 Dec 2018 03:23:06 +0000https://my.vanderbilt.edu/marijuanalaw/?p=555[Updated 12/21 10:45 am: As expected, President Trump signed the Farm Bill into law on Dec. 20. The Commissioner of the FDA also issued a notable statement on the Bill (h/t to Doug Berman). The Commissioner emphasizes the points I make below regarding the ongoing limitations imposed by the FDCA on the use of CBD in food / drug products. The full statement can be found here.]

Congress has just passed the 2018 Farm Bill, which President Trump is expected to sign soon. The Farm Bill includes some important changes to federal law governing marijuana. Marijuana Moment has compiled the relevant provisions into a relatively concise document (the entire bill is roughly 900 pages), which can be found here.

Unfortunately, even the Cliff Notes version of the Farm Bill is difficult to follow. Hence, in this post, I’ll summarize some of the key changes wrought by the Farm Bill and discuss their implications for marijuana law.

1) The bill legalizes some “marijuana” by narrowing the definition of marijuana under federal law.

As discussed in my book (Chapter 2), the Controlled Substances Act (CSA) adopts a broad definition of marijuana. To simplify somewhat, under the CSA, marijuana includes the buds, leaves, and germinating seeds of the cannabis plant, along with substances extracted from those parts of the plant. However, marijuana does not include the stalks and non-germinating seeds of the cannabis plant, or substances extracted from those parts.

Importantly, cannabinoids like THC or CBD play no role in the CSA’s definition of marijuana. The bud of a cannabis plant is still marijuana, even if it contains no THC. Conversely, the stalk of the same cannabis plant is not marijuana, even if it does contain THC. In similar fashion, CBD extracted from the bud of a cannabis plant is marijuana, but CBD extracted from the stalk of the same plant is not. (See my book, pages 21-31, and Is CBD Legal Under Federal Law?, for more in-depth discussion of these points.)

The 2018 Farm Bill changes the definition of marijuana in a critical way—even though, interestingly, it never mentions “marijuana” by name. The Bill (implicitly) declares that the buds, leaves, and germinating seeds of a cannabis plant and the substances extracted therefrom are no longer considered “marijuana”, as long as they contain very little THC. The Farm Bill does this by reclassifying such materials as “hemp.” Here’s the relevant language from the Bill:

“The term ‘hemp’ means the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol [THC] concentration of not more than 0.3 percent on a dry weight basis.”

Farm Bill, Section 10113 (page 429).

The implications of this change are clear: Cannabis plants and any THC or CBD extracted from those plants are no longer considered marijuana – and thus, no longer subject to the CSA – if they do not exceed the .3% THC (once dried) concentration. In other words, the possession of these items is no longer a crime under federal law.

2) Hemp (née, marijuana) will still be subject to regulations.

While the Farm Bill removes hemp (née, marijuana) from the purview of the CSA, it subjects hemp to regulations (Plans) still to be written. Those Plans will be drafted either by the states or by the federal Department of Agriculture.

State Plan. The Farm Bill empowers states to assume primary responsibility for regulating hemp. (The Bill also empowers tribes to do the same, but for ease of exposition, I’ll only discuss states here.) To exercise this option, a state must submit a regulatory plan to the Secretary of Agriculture. The State Plan must satisfy some conditions enumerated in the Farm Bill. In particular, the state must:

a) Track where hemp is being produced in the state
b) Test THC levels in hemp
c) Provide for the disposal of plants and products derived from those plants that are in violation of the Farm Bill (more on this below)
d) Conduct random inspections of grow sites
e) Devote resources to the enforcement of the State Plan
f) Share information on hemp producers with federal law enforcement

Farm Bill, Section 10113 (pp. 429-432)

The Farm Bill also gives states the option of banning hemp outright, if they so choose. This, at least, is how I read the Bill’s preemption provision, which spares state laws that are “more stringent” than federal law. See Farm Bill, Section 10113 (page 430); see also id. (page 432) (seemingly acknowledging that the “production of hemp” could be “prohibited by the State”).

Federal Plan. In the alternative, that is, if state does not submit a State Plan or ban hemp altogether, hemp producers would be governed by federal regulations. These regulations will be promulgated by the federal Department of Agriculture. The Federal Plan must meet the same criteria set forth above for State Plans (e.g., it must track where hemp is being produced, etc.); it must also provide for the licensing of hemp producers.

I suspect states would prefer to assume primary responsibility for the regulation of hemp, but it remains to be seen how many will actually get on the ball and submit acceptable State Plans.

3) The Farm Bill’s impact on the market for CBD products will be somewhat limited.

Much of the excitement over the Farm Bill stems from its potential impact on the market for CBD products. Consumer demand for CBD already exceeds demand for other hemp-related products (often called industrial hemp), like hemp-based textiles. But while the Farm Bill shields hemp-derived CBD from the coverage of the CSA – thereby removing one market obstacle, it does not shield hemp-derived CBD from other federal laws that could continue to limit sales of CBD infused products.

For example, the Farm Bill expressly states that “Nothing in this subtitle shall affect or modify . . . the Federal Food, Drug, and Cosmetic Act [(FCDA)].” Farm Bill, Section 10113 (page 434). The Food and Drug Administration (FDA) has previously warned that it is “a prohibited act [under the FDCA] to introduce or deliver for introduction into interstate commerce any food (including any animal food or feed) to which THC or CBD has been added.” See FDA and Marijuana: Questions and Answers. If federal law prohibits the use of CBD in food products, I suspect that some large companies will decline to incorporate CBD into their beverages, snacks, etc., notwithstanding strong consumer demand for CBD—and notwithstanding the fact that the possession, manufacture, and distribution of the substance, by itself, is now legal (at least when derived from hemp).

Sean O’Connor and Erika Lietzan’s paper, The Surprising Reach of FDA Regulation of Cannabis, Even After Descheduling, does a wonderful job of explaining how the FDCA limits the market for CBD. They also identify some loopholes (my term, not theirs) in the FDCA . For example, it doesn’t appear to ban the sale of raw CBD, and it only applies to food products shipped across state lines or made with ingredients that were shipped across state lines. The existence of such loopholes suggest that sales of hemp-derived CBD could thrive post-Farm Bill, albeit perhaps not to the degree suggested by the most optimistic commentators.

The Farm Bill’s impact on the market for THC products will likely be even more muted. Under the Bill, farmers can grow hemp with high concentrations of CBD, thereby allowing for economical (volume) production of hemp-derived CBD. By definition, however, farmers cannot grow “hemp” with high concentrations of THC. In any event, even if hemp producers could economically extract large quantities of THC, the sale of such extracts would probably remain unlawful. After all, the Farm Bill imposes a tight cap on THC concentrations in hemp “extracts” as well as cannabis plants.

The Farm Bill contains a few other less important but still interesting provisions worth noting here.

4) The Farm Bill limits the sanctions that apply to negligent violations of State and Federal Plans, thereby reducing the legal risks faced by hemp producers.

The Farm Bill limits the punishment that the federal and state governments may impose upon hemp producers who negligently violate a State or Federal Plan. With regard to State Plans, for example, the Bill provides that,

“A hemp producer that negligently violates a State . . . plan . . . shall not as a result of that violation be subject to any criminal enforcement action by the Federal Government or any State government . . .”

Farm Bill, Section 10113 (page 431). Instead, negligent violations are subject only to “Corrective Action,” which basically means that the producer must promptly correct the violation. For example, a farmer who mistakenly grows plants that exceed the Bill’s THC limits would probably just need to destroy those plants.

This is an important protection for hemp producers. The THC content of any given cannabis plant can vary significantly over time, due to growing conditions, cultivation practices, and so on (see book pages 18 and 367). Because of these variations, producers may worry that the hemp they cultivate today could become marijuana tomorrow, exposing them to severe criminal sanctions under the CSA in the process. The Farm Bill reassures producers that if they breach the limits imposed by the law through mere negligence, they cannot be prosecuted under the CSA or comparable state laws.

5) The Farm Bill might force states to exclude marijuana producers from the hemp market.

Even though the Farm Bill offers states the opportunity to assume primary responsibility for regulating hemp, it might force them to exclude marijuana producers from the hemp market to take advantage of this opportunity. The relevant provision of the Farm Bill indicates that a State Plan must include (among other items noted above),

“a procedure for the effective disposal of— (I) plants, whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants.

Farm Bill, Section 10113 (at 430).

Read literally, this provision appears apply to all marijuana within a state. After all, high-THC cannabis grown for the medical or adult use markets would be “produced in violation” of the Farm Bill. For example, the provision would seem to require California to adopt a “procedure for the effective disposal of” the high-THC marijuana now being produced for the state’s adult-use market, that is, if the state wants to assume primary responsibility for regulating hemp. At the very least, it might require California (and other legalization states) to exclude licensed marijuana producers (i.e., those that handle high THC products) from the hemp market, in order to comply with the Farm bill’s requirements for State Plans. After all, it would be difficult for a state like California to comply with this provision, if licensed hemp producers are also cultivating high-THC, at least in the same facility.

Note that this provision does not impermissibly commandeer the states. The Farm Bill imposes obligations on the states only if they choose to submit a State Plan; but because States may decline to submit a plan in the first instance (point 2) above), there is no command.

6) The Farm Bill reduces some barriers to interstate commerce in hemp.

Another, little noticed provision in the Farm Bill declares that,

(a) Nothing in this title . . . prohibits the interstate commerce of hemp . . . or hemp products.
(b) No State . . . shall prohibit the transportation or shipment of hemp or hemp products produced in accordance [a State or Federal Plan] through the State . . .

Farm Bill, Section 10114. This provision is likely designed to prevent states from interfering with shipments of hemp bound for other states. For example, it prevents Indiana from seizing a shipment of Kentucky hemp on its way to Michigan, even if possession (etc.) of hemp remain illegal under Indiana law.

Section 10114 only addresses transportation – i.e., it doesn’t explicitly block a state from banning the sale of out-of-state hemp within the state. Nonetheless, the provision could indirectly limit state power to discriminate against out-of-state hemp producers. Normally, such discrimination violates the dormant Commerce Clause. The assumption behind the dormant Commerce Clause is that Congress usually wants to eliminate barriers to interstate trade. With marijuana, that assumption arguably doesn’t hold water, because Congress is trying to quash interstate commerce in the drug, not promote such commerce. This is why many believe that state discrimination in the marijuana market, e.g., in the form of residency requirements for licensing (see book pages 451-452), does not (yet) violate the dormant Commerce Clause (see book pages 283-288). However, because the Farm Bill legalizes hemp, it might make resuscitate dormant Commerce Clause challenges to state discrimination in the hemp market. In other words, the Farm Bill might make it more difficult for states to sustain discrimination against out-of-state hemp producers.

That’s it for now. I’m sure there will be more to write about the Farm Bill in the near future.

]]>UPDATE: State Judge Holds Use of Race in Ohio Medical Marijuana Licensing Unconstitutionalhttps://my.vanderbilt.edu/marijuanalaw/2018/11/update-state-judge-holds-ohio-medical-marijuana-licensing-system-unconstitutional/
Tue, 20 Nov 2018 17:16:25 +0000https://my.vanderbilt.edu/marijuanalaw/?p=549A state trial judge has just held that Ohio’s use of racial preferences in the award of state medical marijuana cultivation licenses violated the Equal Protection Clause of the Fourteenth Amendment (and the Ohio state constitution). The full decision in PharmaCann Ohio, LLC v. Ohio Department of Commerce can be found at Pharmacann Ohio v. Ohio Dep’t Commerce Summary Judgment Ruling.

The decision is notable because it is the first time that a court has ruled on the constitutionality of measures aimed at reducing race disparities in marijuana licensing. (The book discusses those disparities, the steps different states have taken to address them, and the legal issues raised by them on pages 454 n.1 and 520-525.)

In this post, I’ll provide some additional background on the PharmaCann case; digest the court’s decision invalidating Ohio’s use of racial preferences; and make three observations on the ramifications of the decision.

First, some background. I wrote about the facts of the case in a prior post:

“Ohio incorporated racial preferences into its own medical marijuana licensing system in 2016. The relevant provision of the Ohio statute (RC section 3796.09(C)) requires the state licensing board (the Department of Commerce) to

‘issue not less than fifteen per cent of . . . licenses to entities that are owned and controlled by . . . . [persons who] are members of one of the following economically disadvantaged groups: Blacks or African Americans, American Indians, Hispanics or Latinos, and Asians.’

In 2017, the Department received applications from 36 firms that met the state’s minimum qualifying criteria. The Department then scored and ranked those applications based on their business, operations, quality assurance, security, and financial plans. . . . In November 2017, it proceeded to award 12 provisional cultivation licenses. The winners included the top 10 scoring firms, but also applicants ranked 14th [(Parma Wellness)] and 23rd [(Harvest Grows)], respectively.

Although the case still bears its name, PharmaCann is no longer a party to the suit, due to an interesting twist in the case. Namely, PharmaCann’s claims were mooted in May 2018 when the DOC awarded it a new license. The DOC acknowledged it had made errors in scoring applications, and that absent those errors, PharmaCann would have ranked 8th. But rather than revoke one of the 10 licenses it had awarded to other non-minority applicants, the DOC decided to create an additional (13th) license for PharmaCann. One might wonder why the DOC didn’t simply award Greenleaf an additional license to moot its claims as well (and thereby make this suit go away), but there would be several problems with that strategy. Among other things, creating a 14th license would have put the DOC out of compliance with section 3796.09(C). That section calls for the agency to award “at least fifteen percent” of licenses to minority owned and operated applicants, but 2/14 is only 14.3 percent.

So the case continued with Greenleaf as the lone plaintiff. On November 16, 2018, the judge granted Greenleaf’s motion for summary judgment on the grounds that RC section 3796.09(C) violated the Equal Protection Clause and the Ohio Constitution.

In so doing, the judge (correctly, I think) held that strict scrutiny applies to RC section 3796.09(C). (PharmaCann, p. 5) Although the law ostensibly targets “economically disadvantaged groups”, it defines that term entirely by race – making this a race-based classification. That means the state had to show the law was narrowly tailored to serve a compelling government interest – a tall task. Indeed, the judge found that the state failed both prongs of the strict scrutiny test.

First, the judge held that the state had failed to demonstrate a compelling interest in using racial preferences to award marijuana licenses. The judge acknowledged that the state’s asserted interest – “redressing past and present effects of racial discrimination . . . where the State itself was involved” – could be compelling, for constitutional purposes. (PharmaCann, p. 7) However, he was not convinced by the state’s evidence that there was discrimination (past or present) against all members of designated class (i.e., all the different racial groups included in the definition of “economically disadvantaged groups”) in the relevant market (i.e., the Ohio legal marijuana industry.)

The government appeared to offer three types of evidence to demonstrate racial discrimination.

The ACLU study is excerpted and discussed in the book on pages 248-249. This study was perhaps the government’s strongest evidence demonstrating racial discrimination concerning marijuana. Nevertheless, the judge found it to be insufficient:

“Defendants included evidence of statistical studies published by the American Civil Liberties Union in 2013. . . . This data, in connection with the vast amount of anecdotal evidence provided by Defendants, shows the legislature considered evidence of racial disparities for African Americans and Latinos regarding arrest rates for crimes related to marijuana. The Court does not find this to be evidence supporting a set aside for economically disadvantaged groups, including not only Blacks or African Americans, Hispanics or Latinos, but also American Indians and Asians, who are not referenced in either the statistical evidence or the anecdotal evidence on arrest rates. Evidence of increased arrest rates for African Americans and Latinos for marijuana generally, is not evidence supporting a finding of discrimination within the medical marijuana industry for Blacks or African Americans, Hispanics or Latinos, American Indians, and Asians.” (PharmaCann, pp. 8-9)

In other words, the judge found this evidence a) did not demonstrate racial discrimination against the entire benefited class, only part of it; and b) did not demonstrate discrimination in the relevant market, i.e., the legal marijuana industry. I think this is a relatively straightforward application of City of Richmond v. J.A. Croson, 488 U.S. 469 (1989), where Supreme Court made similar points about the shortcomings of using evidence of discrimination against one group in one market to support preferential treatment of other groups in other markets.

2) Studies showing discrimination in the award of government contracts.

These studies had been successfully used by Ohio to defend minority set aside programs (called Minority Business Enterprise) for government contracting the state adopted in 1980 and 2003.

But the court found this evidence insufficient for two reasons. For one thing, it suggested that the studies were irrelevant because the legislature had not actually considered them when it adopted RC section 3796.09(C):

“The only evidence clearly considered by the legislature prior to the passage of R.C. §3796.09(C) is marijuana related arrests. . . . There is evidence that legislators may have considered MBE history and specifically requested the inclusion of a provision similar to the MBE program. However, the only evidence provided are a few emails seeking a provision like the MBE program and revising the terms. . . . No testimony shows any statistical or other evidence was considered from the previous studies conducted for the MBE program.” (PharmaCann, pp. 8-9).

And crucially, the judge held that he would ignore – or heavily discount – evidence not actually considered by the legislature when passing the program:

“Some of the evidence Defendants provide may not have been considered by the legislature during their discussion of R.C. §3796.09. . . . [In a related context, c]ourts have reached differing conclusions as to whether post-enactment evidence may be used in a court’s analysis; . . . [one court has] held ‘post-enactment evidence may not be used to demonstrate that the government’s interest in remedying prior discrimination was compelling.’ . . . The Court finds this ruling to be the most persuasive. Even if the Court were to find post-enactment evidence permissible, it would give it weight similar to [another court], which has held, ‘the main focus . . . must be the legislative findings and informational backdrop which was available to the state legislature prior to the enactment.’ (PharmaCann, pp. 7-8) (citations omitted)

The judge also suggested that the government contracting studies – like the marijuana arrest studies – were not relevant to discrimination in the legal marijuana industry:

“[E]ven if the Court could find this evidence was considered by the legislature in support of R.C. §3796.09(C), the materials . . . pertain to government procurement contracts only. The law requires that evidence considered by the legislature must be directly related to discrimination in that particular industry.” (PharmaCann, p. 11)

Indeed, the judge went so far as to suggest that the state could not (yet) prove there was discrimination in the legal marijuana industry because that industry is entirely new: “[S]uch newness necessarily demonstrates that there is no history of discrimination in this particular industry, i.e. legal cultivation of medical marijuana.” (PharmaCann, p. 11)

I suspect the judge’s decision regarding this second type of evidence (studies of government contracting) is more vulnerable than his decisions regarding other matters in the case. For one thing, as the judge acknowledges, courts disagree about whether they should consider evidence of discrimination the legislature itself may not have considered. An appeals court might hold that the judge should have considered this evidence (even if it might not have changed the result in the case). What is more, while the Croson Court suggested that the evidence the state uses must demonstrate discrimination in the relevant market, I don’t think that necessarily forecloses consideration of evidence showing discrimination in closely related markets (as the judge in PharmaCann seems to suggest in the last line quoted above). After all, a clever plaintiff could always describe a particular market as being “new” or somehow distinct from one in which discrimination was previously demonstrated (e.g., Uber is not the same as Lyft, which is not the same as a taxi, which is not the same as a livery service, and so on). And as a practical matter, it might prove impossible to demonstrate discrimination in small markets (like Ohio’s medical marijuana cultivation industry) without making comparisons to other markets.

To be sure, figuring out which comparisons are relevant can be tricky, as I discuss in a previous post on a study commissioned by Maryland to defend its use of racial preferences in marijuana licensing. See New Study Defends Constitutionality of Racial / Gender Preferences in the Award of State Marijuana Licenses. But suggesting that a state can only redress past discrimination that has been demonstrated in the targeted market, and cannot attempt to nip such discrimination in the bud (so to speak) – namely, before it appears – seems to me too strict a reading of Equal Protection doctrine.

3) Discrimination in other states’ marijuana licensing programs and their efforts to combat such discrimination

Lastly, the state offered news accounts “showing disparities perpetuated in other states’ marijuana programs” and citing measures adopted by different states to boost minority participation in their marijuana industries. (PharmaCann, p. 12)

The judge, again, found this evidence irrelevant, both because it was all generated “post-enactment” (PharmaCann, p. 11) and thus (like the contracting studies above) could not have been considered by the legislature, but also because “[n]one of the programs [adopted by other states includes] a mandatory set aside, like like R.C. §3796.09(C)”:

“Illinois’s program allots additional points if 51% of an applicant is owned by a minority, female, veteran, or disabled person. 68 Ill. Adm. Code §1290.70(d)(7). Pennsylvania includes general requirements for businesses to include diversity plans and requirements of the government to foster the submission of diverse applications. 28 Pa. Code §1141.32.

Similarly, Maryland’s law includes requirements that the government shall encourage diverse applicants and ‘[t]o the extent permitted by federal and State law, actively seek to achieve racial, ethnic, gender, and geographic diversity when licensing medical cannabis growers[.]’ Md.Code Ann., Health-Gen. 13-3306. Florida does not include a broad minority set aside, like Ohio, but a provision focusing solely on Black farmers who are members of the Black Farmers and Agriculturalists Association-Florida Chapter . . . Fla.Stat. §381.986.” (PharmaCann, pp. 11-12)

Second, the judge also found that the law was not narrowly tailored to serve a compelling interest. On this point, the court cited several problems with the adoption of the racial quotas contained in RC section 3796.09(C):

For one thing,

“The Defendants did not show evidence of any alternative remedies considered by the legislature before enacting R.C. §3796.09(C).

The Court believes alternative remedies could have been available to the legislature to alleviate the discrimination the legislature stated it sought to correct. If the legislature sought to rectify the elevated arrest rates for African Americans and Latinos/Hispanics possessing marijuana, the correction should have been giving preference to those companies owned by former arrestees and convicts, not a range of economically disadvantaged individuals, including preferences for unrelated races like Native Americans and Asians.” (PharmaCann, p. 14)

Furthermore, the court was troubled that the 15% target was arbitrarily chosen:

“Defendants admit that the 15% stated within R.C. §3796.09(C) was lifted from [the minority set aside program used for government contracting] without any additional research or review by the legislature regarding the relevant labor market described in R.C. §3796.09(C), the medical marijuana industry. . . .

Defendants argue that the numbers asassociated with the contracting market are directly applicable to the newly created medical marijuana industry because of a disparity study conducted by Maryland [Professor’s note: the one I mentioned above.] . . . The Maryland study was not reviewed by the legislature before enacting R.C. §3796.09(C), and is a review of markets and disparity in Maryland, not Ohio. Accordingly, the Court finds this one study the Defendants use to try to connect two very different industries (government contracting market and a newly created medical marijuana industry) have little weight, if any. . . .

Regarding the statistics the legislature did review prior to enacting R.C. §3796.09(C), the cited statistics pertaining to the arrest rates of minorities are not directly related to the values listed within the statute. . . . Within the 2013 ACLU study, . . . [it] ‘found that black Ohioans were arrested 41 times more often for marijuana possession than white Ohioans in 2010.’ . . . This number is the evidence most directly related to the effects of discrimination based on marijuana arrests in Ohio statewide. Yet, this statistic, or any of the other statistics cited in the materials, is not reflected in the amount chosen to remediate the discrimination . . ., fifteen percent. This percentage is not based on the evidence demonstrating racial discrimination in marijuana related arrests in Ohio. Therefore, the Court can only conclude the numerical value was selected at random by the legislature, and not based on the evidence provided.” (PharmaCann, pp. 15-16)

Notwithstanding my concerns with some of the judge’s reasoning (noted above), I think he reaches the correct conclusion on the (un)constitutionality of RC section 3796.09 under current Equal Protection doctrine.

So what are the ramifications of the decision?

1. It is unclear what the decision means for the licenses awarded to Parma Wellness and Harvest Grows (the two applicants owned and operated by economically disadvantaged groups).

The judge found the racial preferences to be severable from the rest of Ohio’s medical marijuana law, so the decision in PharmaCann doesn’t jeopardize Ohio’s medical marijuana program.

I suspect the court will order the DOC to award Greenleaf (the plaintiff) a license. But that doesn’t necessarily mean DOC will strip Parma Wellness and Harvest Grows of their licenses. The DOC could just create another license for Greenleaf, much as it did to remedy the scoring error it made regarding PharmaCann (see above). Indeed, neither Parma Wellness nor Harvest Grows was even a party to this litigation, which was brought as a suit against the DOC. I’m not sure who would even have standing (in Ohio courts) to demand the revocation of those two licenses. So even if RC 3796.09(C) is unconstitutional, it may yet still have the desired effect on the racial composition of Ohio’s licensed marijuana industry.

The case also holds two lessons for states considering ways to boost minority participation in the marijuana industry:

2. States should consider race-neutral options to achieve more racial diversity in licensing.

The decision highlights just how demanding the requirements of strict scrutiny are –and why it’s often described as “strict in theory, fatal in fact.” Any race-conscious program to boost minority participation in the marijuana industry will likely be subject to these demanding requirements. (There may be some exceptions, like outreach programs that merely encourage minorities to apply for licenses.)

But the ruling in PharmaCann doesn’t apply to race-neutral measures designed to boost minority participation. For example, a state could consider lowering the fees it charges all applicants for marijuana licenses. In Ohio, these fees are quite steep and may have made it comparatively difficult for economically disadvantaged groups (including many minorities) to seek a license. The state charges $20,000 just to apply for a Level I (large scale) marijuana cultivation license, and it charges another $200,000 annually to keep such a license. Lowering those fees could help minority applicants, who might have less access to loans and other sources of capital as compared to white applicants. But because this move would be race neutral (i.e., it would benefit all applicants, regardless of their race) it would not be subject to strict scrutiny. What is more, pursuing race-neutral options like this first could help bolster the case for the use of racial preferences later (i.e., for showing they are narrowly tailored), if a state was not satisfied with the efficacy of race neutral measures.

3. States need to assemble more evidence to sustain race conscious programs.

One of the key problems in this case was that the state legislature did not do enough homework before adopting the racial preferences for marijuana licenses. Even if another court were to view the evidence more charitably (e.g., to consider some of the evidence the judge discounted or ignored), it still might not be enough to pass strict scrutiny.

This is why I applaud efforts like Maryland’s to commission of studies of racial disparities in the marijuana industry and related industries. Maryland’s study may have been flawed (for reasons I discuss in my earlier post) and it may have come too late to save Maryland’s racial preferences (Maryland’s licensing authority balked at using those preferences before the study was commissioned, as noted in the book on pages 520-525). But if a state is committed to using racial preferences in the award of marijuana licenses, it probably needs to undertake that sort of effort.

That’s it for now. Here are two additional links that might be of interest to the reader:

Suit Challenging Maryland’s Refusal to Use Racial Preferences in Licensing Has Been Settled

Michigan voters approved Proposal 1 by 56% to 44%, making Michigan the 11th state (if we include D.C.) to legalize recreational marijuana. North Dakota voters rejected a recreational legalization measure (Measure 3) by 60% to 40%.

Missouri and Utah voters choose to legalize medical marijuana. Missouri’s Amendment 2 passed by 65% to 35% (two other legalization measures failed to capture even a majority of votes); Utah’s Proposition 2 passed by 53% to 47%. (These tallies are preliminary and may change, though the outcomes will not). The November election raises the number of states that have legalized medical marijuana to 34 (again if we include D.C.).

]]>Podcast on Good Law, Bad Lawhttps://my.vanderbilt.edu/marijuanalaw/2018/11/podcast-on-good-law-bad-law/
Fri, 02 Nov 2018 17:27:01 +0000https://my.vanderbilt.edu/marijuanalaw/?p=543Readers might be interested in a recent podcast I did with Aaron Freiwald, a Philly area attorney who runs an excellent podcast series called Good Law, Bad Law. The series is conversational in style and covers a host of legal topics — my conversation with Aaron, for example, spanned a number of subjects relating to marijuana law. You can find the series on the usual platforms: Podbean, Stitcher, iTuens, Google, Spotify, and Overcast, or at the Good Law, Bad Law website. I am on episode #104 , but there are other episodes discussing marijuana law that you might want to check out. Enjoy!

Although the defendant (and indeed, all state-licensed marijuana businesses) clearly violated the RICO statute, the plaintiffs failed to prove that they had actually suffered a cognizable injury stemming from that violation. To be sure, as discussed in the post linked above, last year (2017) the Tenth Circuit held that the plaintiffs had made legally sufficient allegations in their complaint. But in that case, the court was reviewing a motion to dismiss – and for such a motion, the court is required to accept the allegations in the plaintiffs’ complaint as true. In other words, the Tenth Circuit never made any factual findings in the case; it merely held that the plaintiffs’ allegations—IF accepted as true—would state an actionable claim under the RICO statute.

This meant that following the decision in Safe Streets, the plaintiffs still had to prove their injuries to a jury – and based on yesterday’s jury verdict, it appears they were unable to do so. To be more precise, the plaintiffs failed to prove by a preponderance of the evidence (the standard used in civil trials) that defendants’ marijuana operation had actually diminished the value of their (the plaintiffs’) neighboring ranch property. (As discussed in the post linked above and in the book, the plaintiffs’ alleged two other injuries in their complaint; however, it appears that the trial focused predominantly on the diminution of land value claim.) At the trial, which lasted a couple of days, each side offered competing expert testimony concerning the impact of defendant’s marijuana grow operation on the value of plaintiffs’ land. While the plaintiffs’ expert opined that the defendant’s marijuana business had diminished the value of plaintiffs’ ranch land, it appears the jury was not convinced.

Barring a successful appeal, this RICO lawsuit against these defendants is now over. But this case is likely to have more far-reaching ramifications as well. Namely, I think the jury verdict should lessen somewhat concerns over the marijuana industry’s exposure to RICO liability. The jury verdict highlights a big obstacle to bringing successful RICO claims: to prevail under the RICO statute, a plaintiff must not only allege but also prove a very particular type of injury, namely, an injury to its business or property. I suspect there are few (if any) plaintiffs who can meet this burden when bringing lawsuits against the marijuana industry; indeed, the whole point of the RICO injury/standing requirement is to limit the ability of private parties to bring these suits. In light of the Safe Streets/Reilly jury verdict—not to mention the recent dismissal of a similar lawsuit in Oregon (see here), I suspect other plaintiffs will be less eager to file copycat RICO lawsuits against the marijuana industry.

To be sure, the verdict doesn’t eliminate the marijuana industry’s exposure to RICO liability. For one thing, every suit—and every plaintiff—is different. Just because these plaintiffs (the Reillys) couldn’t prove their damages against this defendant and before this jury doesn’t necessarily mean that another plaintiff, with another defendant, and another jury, would be unable to do so. Thus, other plaintiffs who feel they have a stronger case against other defendants might pursue their claims, notwithstanding the adverse (for plaintiffs) verdict in Safe Streets/Reilly. In addition, even if their hopes of winning a jury verdict have been somewhat diminished, some plaintiffs might yet bring RICO lawsuits against marijuana businesses merely on the hopes of extracting a positive settlement from those businesses. The idea is that a defendant might pay to settle a case to avoid all of the expenses (and uncertainty) of going to trial—even if the defendant believes she would win at trial. Safe Streets/Reilly was a bit of an aberration — few civil cases actually proceed all the way through trial.

]]>Four Marijuana Measures on the Ballot in November 2018https://my.vanderbilt.edu/marijuanalaw/2018/10/four-marijuana-measures-on-the-ballot-in-november-2018/
Mon, 29 Oct 2018 20:34:14 +0000https://my.vanderbilt.edu/marijuanalaw/?p=537Voters will decide the fate of marijuana legalization measures in four states next week. Michigan and North Dakota voters will decide whether to legalize recreational marijuana (both states already have medical marijuana laws), and Missouri and Utah voters will decide whether to legalize medical marijuana (both states already have CBD laws). The Washington Post has a good, short description of each state’s measure(s) here.

For the most part, these proposals fit the mold of laws already adopted elsewhere and discussed throughout my book. However, there are a few ways in which they bend (not break) the mold. Let me discuss each in turn, starting with the most noteworthy.

North Dakota’s recreational marijuana law is notable for at least three reasons. First, arguably, it would be the most permissive recreational measure in the entire nation. That’s because unlike every other recreational marijuana law now on the books (see book pages 127, 416-417), Measure 3 imposes no limits on the quantity of marijuana that individuals may possess or cultivate for their own use. It also imposes no special tax on marijuana sales by commercial vendors, giving North Dakota the lowest recreational marijuana tax rate in the nation. (To be sure, those sales would still be subject to the state’s general sales tax—as they are in other states, and the legislature could impose a special tax on marijuana sales later, if it so chooses.)

Second, in comparison to other recreational marijuana states, North Dakota would grant much more generous retroactive relief to persons convicted of past marijuana crimes. In particular, Measure 3 would automatically expunge all past convictions for marijuana offenses. See Sec. 25-03.1-45. By comparison, most other states require past offenders to apply for expungement (or other relief), and states commonly reserve relief for those convicted only of relatively minor offenses, like simple possession. (I discuss California’s and Colorado’s approaches to retroactive relief in Do (Should) Marijuana Reforms Apply Retroactively?).

Third, if Measure 3 passes, North Dakota would be the fastest state to expand from medical to recreational legalization. Each of the 10 other states (including D.C.) that has already legalized recreational marijuana legalized medical marijuana first. But on average, it took those states more than 13 years to expand from medical to recreational. Massachusetts and D.C. were the fastest to expand, moving from purely medical to recreational legalization in just 4 years. California took the longest—20 years. However, if Measure 3 passes, North Dakota would go from medical to recreational legalization in just 2 years (voters passed the state’s medical marijuana law, Measure 5, back in 2016).

Michigan’s proposal is not quite as permissive as North Dakota’s, but it would still impose relatively generous quantity limits (12 plants and 10 ounces of marijuana) for personal use, and it would impose a relatively low excise tax on the drug (10%). To put those numbers in perspective, most recreational marijuana states limit possession to just 6 plants and 1 ounce of marijuana (see book page 127), and most states impose special taxes in excess of 20% on recreational marijuana sales (see pages 489-491).

Importantly, if adopted, the Michigan and / or North Dakota measures could set an effective ceiling on the tax rate that neighboring jurisdictions (e.g., Ohio, Illinois, and Minnesota) could expect to impose on recreational marijuana sales. As I discuss in the book (pages 495-498) and in State Taxation of Marijuana Distribution, and Other Federal Crimes, if a state imposes a relatively high tax on a portable commodity like marijuana, consumers and smugglers will seek to avoid the tax, e.g., by buying the drug in states with lower taxes.

Missouri voters will actually consider 3 different proposals this November (if more than 1 passes, the one with the higher / highest number of votes will become law). Amendment 3 and Proposition C would each require qualified patients to buy marijuana from a licensed commercial vendor. This is what the book labels the “commercial only” approach to marijuana supply (see page 480). This approach has been very popular among states that have legalized medical marijuana since 2009 (see Figure 10.1 on page 532). These two proposals appear to differ mainly in the tax they would impose on medical marijuana: 15% (for Amendment 3) vs. 2% (Proposition C). Amendment 2 would license commercial suppliers (and tax sales at 4%), but it would also permit personal cultivation (what the book labels the “Mixed” approach to marijuana supply (see page 480)).

That’s it for now. It will be interesting to watch how all of these proposals fare at the ballot box on November 6.

]]>The Foreignness of Canadian Marijuana Legalizationhttps://my.vanderbilt.edu/marijuanalaw/2018/10/the-foreignness-of-canadian-marijuana-legalization/
Fri, 19 Oct 2018 19:54:35 +0000https://my.vanderbilt.edu/marijuanalaw/?p=532On October 17, Canada became the second country to legalize recreational marijuana (Uruguay did so in 2014). The Canadian Government has posted the full text of the nation’s recreational marijuana laws (including The Cannabis Act) here. It also has a useful summary of the laws here.

In many respects, Canada’s new law resembles the laws adopted by recreational marijuana states like California, Colorado, and Massachusetts. But Canada’s approach to legalization is unique in a few noteworthy respects. Because those differences could prove instructive to U.S. lawmakers, I’ll focus on them here. (In a similar vein, I’ve previously discussed some unique features of Canada’s medical marijuana laws in the book (see pages 226, 271, 506-507, 510-511).)

So here goes:

1. Canada’s minimum age for “recreational” (or adult) use is lower than the minimum age in the U.S.

The national Cannabis Act provides that individuals must be at least 18 years old to buy marijuana. To be sure, the Act empowers Canada’s ten provinces to raise the minimum age, and every province except Alberta and Quebec has done so – but only by raising their minimum ages to 19 years. These marijuana age limits are similar to the ones Canadian provinces have set for alcohol: Seven provinces have set the minimum age to buy alcohol at 19 years, while three of them (Alberta, Manitoba, and Quebec) have set the minimum age at 18 years.

By contrast, all ten of the states (I’m including D.C.) that have legalized recreational marijuana have set the minimum age for purchase (and possession) at 21 years. Not coincidentally, this is the same minimum age all fifty states (plus D.C.) have set for the purchase of alcohol.

Although American lawmakers might be interested to know how the lower Canadian age limits effect use by minors (those under 21 years), I seriously doubt any state will lower its minimum age for recreational marijuana. Politically, it would be difficult to do so, because (rightly or wrongly) the move would likely stoke fears about teen usage. I suspect the federal government would also make it costly for a state to lower its minimum age below 21 years. The federal DOJ could do so by threatening to prosecute any state-licensed distributor who sells marijuana to individuals under 21 years—indeed, federal law imposes especially harsh sanctions on anyone who distributes marijuana to or around minors (see book pages 375-377 for a discussion of aggravating circumstances). Or Congress could threaten to withhold a portion of federal grants to states that lower their minimum age for purchasing marijuana. Congress has already employed this tactic for alcohol. It makes a portion of federal highway grants contingent on states prohibiting the purchase or public possession of alcohol by anyone under 21 years. The threat of losing those funds is one big reason why all states have set the minimum age for purchasing alcohol at 21 years. And Congress seems committed to that number for marijuana as well; as noted in this post, for example, the States Act (one of the leading federal reform proposals) would continue to ban sales of recreational marijuana to anyone under 21 years, regardless of whether those sales are authorized by state law.

2. The Canadian federal government plays a much more constructive role in regulating marijuana than does the United States federal government.

Canadian legalization is also unique because many of the rules are being written by the national government, rather than by—or not just by—the provinces. The Canadian Parliament passed the Cannabis Act in June 2018. The Act legalizes the possession and personal cultivation of marijuana throughout Canada. It also regulates the commercial production of the drug, including the types of marijuana products that may be sold (e.g., no edibles for now) and the labeling and packaging of those products (e.g., nothing that appeals to kids). The Act allows provinces to set some limits on personal possession and cultivation (e.g, those age limits noted above). It also gives them power to regulate the retail distribution of marijuana (e.g., where stores may be located).

In the U.S., by contrast, there are essentially no federal rules governing how to test, package, label, manufacture, or distribute marijuana lawfully—federal law simply bans the production and distribution of marijuana. The lack of federal regulations means that individual states are writing all of the rules to govern the (legal) production and distribution of marijuana in their respective jurisdictions.

The Canadian approach could provide a useful blueprint for allocating responsibility for the regulation of marijuana in the United States. As I’ve complained before (see here and here), the leading federal marijuana reform proposals largely abdicate responsibility for regulating the drug. While those proposals repeal federal prohibition, they do not replace prohibition with civil regulations. Instead, the proposals leave it to the states to figure out how to regulate legal marijuana.

Although many people might prefer this hands off approach to the status quo (i.e., federal prohibition), they might prefer Canada’s allocation of responsibility even more. For example, many people might prefer to have the federal government regulate the labeling of marijuana products (as it now regulates the labeling of alcohol and pharmaceuticals), rather than to leave that issue to individual states. After all, every reform state has adopted its own, idiosyncratic set of labeling requirements, including requiring the use of different “universal” warning labels on marijuana products (see book pages 458-462); but it’s hard to see what purpose those differences serve, other than (perhaps) to protect local businesses from out-of-state competition.

3. Canadian governments will play an active role in the distribution of marijuana.

The Cannabis Act allows provinces to regulate the retail distribution of marijuana, and even to operate the stores themselves. Indeed, six Canadian provinces (British Columbia, New Brunswick, Nova Scotia, Ontario, Prince Edward Island, and Quebec) and all three territories will sell marijuana through government-operated stores. The other three provinces will license privately owned companies to sell the drug. See here for the national government’s description of the approach taken by each province.

In the U.S., no state currently operates a marijuana store, although Utah has proposed a state-operated-distribution system (as I discuss here) and one municipality has created a public benefit corporation to operate a local marijuana store in Washington state. As I discuss in the post about Utah’s proposal, direct state distribution of marijuana is probably preempted by federal law. To be sure, for reasons I explain in that post, there may not be anyone who could actually challenge a state-operated store in court, even if such a store would be preempted. But concerns about preemption—not to mention all of the other hassles private licensees face because of the federal ban—have likely deterred states from playing a more direct role in the distribution of marijuana to date.

Canada’s experience with government run stores again could prove instructive. If those stores prove successful – not only as businesses, but as a means of combating some of the perceived dangers posed by a privately run marijuana industry – the government supply model might catch on here in the U.S. Recall that many states addressed concerns over the repeal of alcohol Prohibition by assuming direct control over the retail supply of alcoholic beverages.

That’s it for now. For some other interesting observations on developments up north, I recommend:

]]>Observations On Utah’s Proposed State Distribution Systemhttps://my.vanderbilt.edu/marijuanalaw/2018/10/eight-observations-about-utahs-proposal-for-state-distribution-of-marijuana/
Sat, 13 Oct 2018 02:07:14 +0000https://my.vanderbilt.edu/marijuanalaw/?p=516[Updated 10/15 to address the possibility of suits in state court.]

Just as Utah residents are about to vote on a medical marijuana initiative (Proposition 2), proponents and opponents of the initiative (including Governor Herbert) have announced plans to adopt a compromise medical marijuana law in the state legislature. See the full text of the Utah Compromise. The Salt Lake Tribune and Deseret News have good coverage of the compromise here and here.

Voters will still get to vote on Proposition 2, which is a fairly typical medical marijuana law. But the compromise law would change Proposition 2 in several ways, as catalogued by the Deseret News here. Most notably (for my purposes), the compromise calls for the state to directly participate in supplying medical marijuana to qualified patients.

Below I describe the role the state would play in the supply chain under this compromise proposal. I then offer eight observations concerning the rationale behind and special legal concerns raised by the Utah compromise.

Like many other medical marijuana programs, the Utah compromise would license a limited number of private companies to cultivate, process, and distribute marijuana to qualified patients. These companies would be called Medical Cannabis Cultivation Facilities, Processing Facilities, and Pharmacies. However, in addition to authorizing five private Pharmacies to distribute medical marijuana to patients, the compromise also requires the state itself to distribute the drug.

In particular, the compromise declares that the state Department of Health “shall establish a state central fill medical cannabis pharmacy.” Section 26-61b-601(a). Although the details of its structure are a bit opaque, “central fill” would appear to be a state-owned and -operated entity. Qualified patients would have the option of placing their orders with central fill rather than going to one of the five state-licensed (but private) Medical Cannabis Pharmacies. To fill patients orders, central fill would buy medical marijuana from a licensed Processing Facility, the same way that one of those private Pharmacies would. Central fill would then transport the drug to a local health department (another state actor), which would then hand it over to the patient. See id. at section 26-61b-601(2)(a) & (c) (detailing central fill’s role); id. at section 26-61b-607 (detailing the role of local health departments).

Now, for those observations about the compromise.

1. Distributing marijuana directly to consumers could help the state to control the supply of marijuana. . .

Controlling privately owned and operated marijuana suppliers poses a big challenge for state regulators. Private suppliers may try to flout state regulations in order to boost their sales and profits (see, e.g., this post on Sweet Leaf in Colorado). Or they may challenge state regulations in court. For example, many states limit advertising by private marijuana suppliers. Indeed, the Utah compromise would go a step further and ban all advertising by private Medical Cannabis Pharmacies. See section 26-61b-405(1) (“a medical cannabis pharmacy may not advertise in any medium. . . “). But these advertising restrictions raise serious First Amendment concerns (see book pages 501-504) and might thus prove unenforceable if challenged in court.

However, a state that takes direct control over the distribution of marijuana would not face these same challenges. The idea is that a state-owned enterprise should be less inclined to flout state regulations than would be a privately-owned firm. And if it owns the shops, the government can simply refuse to advertise; there would be no need for it to muffle the commercial speech of private actors.

2. . . . however, the government probably needs to monopolize distribution to obtain these benefits.

Many of the advantages of government distribution depend upon the government having a monopoly over distribution. After all, as long as those private suppliers exist, the state will continue to face the challenges posed by them (noted above).

As described above, however, the Utah compromise would not eliminate private suppliers. The state distribution system created by the compromise would simply compete with those suppliers to distribute medical marijuana to qualified patients.

To be sure, Utah’s mixed government/private supply model may have some unique benefits. For example, some patients may prefer to get their medical marijuana from local health departments, rather than from Medical Cannabis Pharmacies (and vice versa). But I’m skeptical Utah’s model will help the state control the distribution of marijuana more effectively, because it continues to authorize private companies to distribute the drug.

3. State officials who work for central fill and local health departments would commit several federal crimes in performing their duties . . . .

Among other statutes, those employees would violate:

21 U.S.C. section 841 (distribution and possession with the intent to distribute marijuana)

18 U.S.C. section 1961 (the RICO statute) (conducting a business through a pattern of racketeering activity)

18 U.S.C. section 1957 (using the proceeds of unlawful activity), and

21 U.S.C. section 856 (managing a place for the purpose of distributing unlawful drugs)

These crimes are discussed in Chapter 7.

To be sure, there is an obscure provision of the federal Controlled Substances Act that immunizes state officials for enforcing state drug laws. 21 U.S.C. section 885(d). However, for reasons explored in the book (see pages 698-703) and in On the Limits of Supremacy (page 1457-1459), section 885(d) wouldn’t immunize state officials for distributing marijuana. In other words, the immunity conferred by section 885(d) is rather limited. So Utah state employees who implement the compromise legislation would be violating sundry federal statutes in the process.

4. . . . but the probability those employees would actually be prosecuted by the federal government is currently zero (0).

Congress has forbidden the federal Department of Justice from enforcing the CSA against anyone acting in compliance with state medical marijuana laws (see book pages 353-358 and here). So even assuming the DOJ wanted to do so (a big assumption in a red state like Utah), the agency couldn’t prosecute state employees (or anyone else) for distributing medical marijuana pursuant to state law. This makes concerns about the criminal liability of state employees largely academic.

5. The state distribution program is plainly preempted by the CSA. . . .

It would be impossible for the employees of the central fill pharmacy and of local health departments to perform their duties under state law without also violating federal law (see point 3 above). Thus, to the extent it requires state employees to distribute marijuana, the Utah compromise would be preempted by the CSA. (I explain why state distribution of marijuana is preempted in greater detail in On the Limits (pages 1457-1459)).

Importantly, barring a state from distributing marijuana does not violate the anti-commandeering rule. For one thing, the ban is generally applicable–i.e., it applies to private citizens and state officials alike), so the anti-commandeering rule probably doesn’t even apply. But in any event, barring the state from distributing marijuana is not the same as requiring the state to bar distribution. For example, the state could still allow private parties to distribute marijuana; it just couldn’t distribute the drug itself (see On the Limits, pages 1453-1455).

6. . . . but it’s possible no one could challenge it in federal court.

Just because the state distribution system plainly conflicts with federal law doesn’t mean someone could necessarily challenge it in federal court. Let me explain by looking at the different types of plaintiffs who might attempt to wage a challenge to Utah’s state distribution system:

Private citizens. The ordinary private citizen (say, an opponent of the compromise) would face two obstacles trying to mount a preemption challenge to the state distribution system in federal court. First, the citizen would probably lack standing to sue. As I explain in A Critical Appraisal:

“Every citizen has an interest in ensuring that her state government obeys the law. Yet that interest, standing alone, is not particularized enough to enable a citizen to claim that a state law is preempted by federal law, at least not in federal court. In most situations, the federal courts reject citizen standing. A suit brought by a citizen on no more grounds than her status as such . . . would be dismissed.” (pp. 661-662)

Even if a citizen had standing, however, she would still run into a second problem: she likely has no cause of action to sue. In Safe Streets Alliance v. Hickenlooper (see here), for example, the Tenth Circuit held that neither the Supremacy Clause nor the CSA creates a cause of action for private citizens (or even local officials) to challenge state law as preempted.

Local governments. A local government would face the same obstacles to challenging the Utah compromise in federal court. Indeed, federal courts are particularly leery of hearing challenges to state law brought by local governments. For example, in Josephine County v. Oregon, the district court recently dismissed a preemption challenge brought by a local government against Oregon’s recreational marijuana law, holding that “a political subdivision of a state lacks standing to challenge a state law in federal court on supremacy grounds.”

State officials. Even state officials who work for central fill or the local health departments likely would not satisfy federal standing requirements (nor would they have a cause of action). While these officials would be required to violate federal law under the compromise (see 3) above), the threat of prosecution by the DOJ is far too remote (see 4) above) to satisfy standing requirements. To satisfy standing requirements, any injury must be concrete and imminent, and not remote or speculative.

Nevertheless, it’s possible a state official coulddelay or even quash the state distribution program without filling a lawsuit. The official could simply refuse to implement the program on the grounds that it is preempted. This actually happened (for a time) in Delaware: state officials temporarily suspended implementation of the state’s medical marijuana licensing system because of (ill-founded) concerns the program was preempted by federal law. There was no lawsuit, no court ruling, just an announcement by the agency responsible for implementing the law. See Preemption Under the Controlled Substances Act (page 6, n.13). I doubt this would happen in Utah, given the breadth of support for the compromise; but it remains a possibility, and I’m not sure what (if anything) state leaders could do to force an official to implement the program, should she/her refuse.

[Update 10/15: As Sam Kamin rightly notes, state officials and private parties might have better luck bringing their preemption challenges in state–rather than federal–court. Indeed, as I point out in Critical Appraisal,

“Despite the roadblocks in federal court, there remains the possibility that plaintiffs could pursue their preemption causes of action in state courts instead. State courts are not bound by Article III or the Supreme Court’s rulings limiting access to the federal courts. In general, persons without an obvious, immediate stake in litigation have a much easier time challenging state laws in state court than in federal court. First, almost every state court allows taxpayers to challenge public expenditures ‘without any individual or particularized showing of injury in fact, and sometimes without even a showing that the expenditure will affect their tax burdens.’ . . . Second, ‘[a] number of states go further and provide, either by constitutional provision, court-made rule, or legislation, for broad, general citizen standing to raise issues of great importance and interest to the public.’ Third, many state courts grant state lawmakers standing to challenge state laws before they take effect. Federal courts, by contrast, reject the claim that lawmakers have any special stake in ensuring the legality of their handiwork; such lawmakers must satisfy the same onerous standing requirements as everyone else.” (pages 662-663) (citations omitted)

However, I think a state (like Utah) could block such suits if it so chooses. For example, Utah could include a provision in its medical marijuana compromise limiting the ability of state officials / private parties to challenge its state distribution system in state court. Of course, it couldn’t bar those parties from litigating in federal court; but for the reasons stated above, I think it’s unlikely these parties could get a federal court to hear their preemption claims.]

The Department of Justice. The DOJ would have standing and a cause of action to challenge Utah’s state distribution system. However, the agency is currently barred from filing such a lawsuit, just as it is barred from prosecuting people acting in compliance with state medical marijuana laws (see 4) above).

In sum, although Utah’s proposed state distribution system is clearly preempted by federal law, there might not be anyone who could actually challenge it in federal court. Most potential challengers would lack standing and / or a cause of action; and while the DOJ would not face these same obstacles, Congress has barred the agency from filing a preemption challenge to state medical marijuana laws.

Two final observations on Utah’s state distribution system:

7. While this would be the first time a state participated directly in the supply of marijuana, at least one municipality has already done so.

As discussed in the book (page 478), the City of North Bonneville, Washington created what it claims is the country’s first municipally-owned marijuana shop back in 2013. The Cannabis Corner is still in operation (see here).

8. The Utah compromise would not be possible in most states.

Utah state leaders have promised to adopt the compromise no matter how the voter initiative (Proposition 2) fares at the ballot box. In many states, such a promise would not be feasible (at least if Proposition 2 passes), because state law limits the power of the state legislature to amend initiatives passed by the voters (and the compromise appears to amend Proposition 2). The book discusses these restrictions on pages 294-295, nn. 4-5. In particular, many states provide that their legislature can only amend an initiative by a super majority vote. But because Utah does not appear to restrict the legislature’s power to amend an initiative (only a simple majority vote is required), state leaders will have an easier time fulfilling their promise should voters pass Proposition 2 this November.